Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about. It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Repligen Corporation (NASDAQ:RGEN) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Repligen
How Much Debt Does Repligen Carry?
As you can see below, at the end of December 2019, Repligen had US$232.8m of debt, up from US$103.5m a year ago. Click the image for more detail. But it also has US$528.4m in cash to offset that, meaning it has US$295.6m net cash.
How Healthy Is Repligen’s Balance Sheet?
We can see from the most recent balance sheet that Repligen had liabilities of US$48.3m falling due within a year, and liabilities of US$292.0m due beyond that. On the other hand, it had cash of US$528.4m and US$43.7m worth of receivables due within a year. So it can boast US$231.7m more liquid assets than total liabilities.
This surplus suggests that Repligen has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Repligen has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Repligen grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Repligen’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Repligen has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Repligen generated free cash flow amounting to a very robust 89% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.
While we empathize with investors who find debt concerning, you should keep in mind that Repligen has net cash of US$295.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$44m, being 89% of its EBIT. So we don’t think Repligen’s use of debt is risky. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with Repligen , and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at [email protected] This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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